The Relation between Earnings Management Using Real Activities Manipulation and Future Performance: Evidence from Meeting Earnings Benchmarks

Gunny, Katherine

doi:10.2139/ssrn.816025

Cited by 193 publications

(404 citation statements)

References 31 publications

(14 reference statements)

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“…He found that earnings management via operating decisions was positively related with firms that achieved these benchmarks (Gunny, 2010). Specifically, they had 0.99% lower selling, general and administrative expenses (SG&A) than the other companies in the study.…”

Section: Theoretical Frameworkmentioning

confidence: 88%

“…Evidence that those companies that reported positive profit margins close to zero had abnormally high volumes of production, can be found in the works of Roychowdhury (2006), Gunny (2010) and Zang (2012). They show, respectively, that those companies that avoided disclosing losses had abnormally higher production levels of, on average, 4.97%, 4.80% and 2.49%, compared with the other companies in the sample.…”

Section: Theoretical Frameworkmentioning

confidence: 94%

“…In other words, the companies reported small but positive results, resulting in a discontinuity in the histogram used to verify such practices and suggesting that these companies ma-ment via operating decisions; and (iii) manipulating classifications within accounting statements. In the opinion of Gunny (2010), earnings management can be divided into two categories: Accruals Earnings Management (AEM), or manipulation of accruals; and Real Earnings Management (REM), involving real operational activities.…”

Section: Theoretical Frameworkmentioning

confidence: 99%

“…Real earnings management (REM), unlike accruals, occurs when managers alter a company's operating activities in an effort to increase or reduce the current period's results (Gunny, 2010). Roychowdhury (2006) defines the manipulation of real activities as management activites that deviate from what are considered normal business practices, with the aim of meeting certain earnings constraints.…”

Section: Theoretical Frameworkmentioning

confidence: 99%

“…Decisions that affect cash flow are documented in national and international literature and include: (i) increases in sales revenue due to an accelaration in the sales process and/or unsustainable sales generation via an increase in (temporary) discounts in prices or an easing of restrictions to credit for clients; (ii) the timing of delivery of goods to clients; (iii) a reduction in the cost of goods sold via an increase in production levels (economies of scale), thus improving the financial results for the period; (iv) a reduction in research and development, staff training, factory maintenance, and sales, marketing and administrative expenses; and (v) the timing of making investments (Fields, Lyz, & Vincent, 2001;Martinez, 2001;Goncharov, 2005;Roychowdhury, 2006;Paulo, 2007;Martinez & Cardoso, 2009;Gunny, 2010;Zang, 2012). Roychowdhury (2006) developed tests in order to investigate whether there is evidence of abnormal real activities among companies that post small annual profits.…”

Section: Theoretical Frameworkmentioning

confidence: 99%

See 4 more Smart Citations

Evitar Divulgar Perdas: Um Estudo Empírico do Gerenciamento de Resultados por Meio de Decisões Operacionais

Reis

Lamounier

Bressan

2015

Rev. contab. finanç.

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The aim of this paper is to verify whether Brazilian companies listed on the BM&FBOVESPA used earnings management via operating decisions, when faced with reporting unfavourable results, in order to avoid disclosing losses. Using panel data covering years from 2008 to 2013 in estimated regression models, the paper focuses on three ways of manipulating financial results through operational decisions: by manipulating sales; by reducing selling, general and administrative expenses (SG&A); and by increasing production to report lower costs of goods sold. The results show that the companies did use SG&A to avoid reporting losses, but did not manipulate sales or levels of production for such purposes. The evidence presented suggests that in Brazil managers are only able to manipulate operational activities by reducing operating expenses (SG&A), probably due a lack of flexibility in the production process and the cash flow constraints faced by Brazilian companies. From a users' perspective, this paper finds that companies do use earnings management via operating decisions to avoid disclosing losses to capital markets, which is consistent with the Prospect Theory.

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Section: Theoretical Frameworkmentioning

confidence: 88%

Section: Theoretical Frameworkmentioning

confidence: 94%

Section: Theoretical Frameworkmentioning

confidence: 99%

Section: Theoretical Frameworkmentioning

confidence: 99%

Section: Theoretical Frameworkmentioning

confidence: 99%

See 3 more Smart Citations

Evitar Divulgar Perdas: Um Estudo Empírico do Gerenciamento de Resultados por Meio de Decisões Operacionais

Reis

Lamounier

Bressan

2015

Rev. contab. finanç.

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Studying the relationship between managerial ability and real earnings management in economic and financial crisis conditions

Oskouei

Sureshjani

2020

Int. J Fin Econ

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Managers with different abilities may make various decisions in economic and financial crisis conditions. Real earnings management, as an important issue, is in the centre of attention for many managers in a crisis condition. In this paper, the role of managerial ability in real earnings management is studied in conditions of economic and financial crisis. This study shows that the managers with higher ability take less usage of real earnings management. The results also indicate that managerial ability, economic and financial crisis have significant and negative effects on real earnings management. This negative effect of managerial ability on real earnings management increases in the conditions of economic crisis. Paying attention to the firms' managerial ability, especially in critical conditions, will lead to more accurate decisions by activist investors.

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Insolvency Prediction in the Presence of Data Inconsistencies

Mendes

Cardoso

Mário

et al. 2014

Intell. Sys. Acc. Fin. Mgmt.

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SUMMARY In this paper we use data inconsistencies as an indicator of financial distress. Traditional models for insolvency prediction normally ignore inconsistent data, either by removing or replacing it. Instead of removing that information, we propose a new variable to capture it; using it together with traditional accounting variables (based on financial ratios) for the purpose of insolvency prediction. Computational tests use three datasets based on the financial results of 2033 Brazilian Health Maintenance Organizations over 7 years (2001 to 2007). Sixteen classification methods were used to evaluate whether or not the new variable impacted solvency prediction. Tests show a statistically significant improvement in classification accuracy – average results improve 1.3 (p = 0.003) and 1.8 (p = 0.006) percentage points, for 10‐fold and leave‐one‐out cross‐validations respectively. In addition, the analysis of false positives and false negatives shows that the new variable reduces the potentially harmful misclassification of false negatives (i.e. financially distressed companies being classified as financially healthy) and also reduces the estimated overall error rate. Regarding the extensibility of the results, even though this work uses data from Brazilian companies only, the calculation of the financial ratios variables, as well as the inconsistencies, could be extended to most companies worldwide subject to governmental accounting regulations aligned with the International Financial Reporting Standards. Copyright © 2014 John Wiley & Sons, Ltd.

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The Relation between Earnings Management Using Real Activities Manipulation and Future Performance: Evidence from Meeting Earnings Benchmarks

Cited by 193 publications

References 31 publications

Evitar Divulgar Perdas: Um Estudo Empírico do Gerenciamento de Resultados por Meio de Decisões Operacionais

Evitar Divulgar Perdas: Um Estudo Empírico do Gerenciamento de Resultados por Meio de Decisões Operacionais

Studying the relationship between managerial ability and real earnings management in economic and financial crisis conditions

Insolvency Prediction in the Presence of Data Inconsistencies

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